Sandhusker
Well-known member
ROSENTHAL COLLINS FUTURES
30 S. Wacker, Ste. 1213, Chicago, Illinois
800-624-6572
(December 3, 1999) CATTLE: "VIEW FROM THE PIT"--We ended last week with a solid $71.00 live cattle trade and a boxed beet price for lightweight choice at $119.55. The picture appears to have gotten considerably more muddled this week, however, as we see that as of today (Wednesday PM) there has been no cash cattle trade in Texas or Kansas. On the other hand, Nebraska is showing over 60,000 head traded for the week with a top of 372.00 live or $114.00 in the beef. Despite this activity in Nebraska the bids in Texas and Kansas are $69.00 while offers are 371.00 and $72.00. I think it is also worth mentioning that Nebraska sells far fewer cattle on contract or formula than Texas or Kansas. Volume for the first 3 days of this week in Texas is 33,900 head with 33,800 as unpriced formula or contract sales while Kansas is showing volume of 42,800 head with 41,700 on formula or contract. Hmmm, I wonder what the price of those Texas and Kansas cattle would have been if somebody had to compete in the market to buy them?
The past 3 weeks have been extremely interesting In both the live market and the futures with the two of them not necessarily corresponding with each other. For example, on November we saw a cash cattle trade that week at $70.00 with a boxed beef trade on lightweight choice at $114.87. As of last week we put almost $5.00 on the beef price while only putting $1.00 on the live cattle price. December and February futures both rallied about 200 points from $69.00 to $71.00 before selling off sharply this week to close today near the monthly low prices of $69.57 and $69.22. in my opinion this recent weakness in the futures is the result of three main factors: (e) Extremely high open interest in the December futures contract. Since a high portion of the long positions are held by funds that must liquidate before deliveries can occur, and a high portion of the short positions are held by hedgers that remain until they market their cattle, it is not unusual to see pressure on the market during the month before deliveries. (b) An announcement earlier this weak that Mexico has decertified 17 packing plants (11 beef) for imports into Mexico. At this time the particulars remain vague on this issue, but it still leaves the door open for plants other than those listed to export product. (c) A great deal of rumor/talk about how the recent increase in beef demand was radically overdone with wild expectations for millennium business that is not happening. Rumors are that much of the advanced buying is being canceled and that will leave an excess of boxed beef. My response to that is simply if that were totally true why are we seeing cattle slaughter for the first 3 days of this week at 390.000 versus 374,000 last year.
While each of the above points are valid, I continue to believe that the increase in beef demand represents far more than Y2K. I believe it represents a major change in eating habits based on high protein. For instance the increase in beef demand began long before any of the Y2K buying began. Further proof of this can be easily seen statistically when we see that from April through October beef production increased about 3% over last year, while the boxed beef cut-out value increased 14%.
Per the November Cattle on Feed report, this report shows 6% more cattle in the feedlots with an increase in October placements of 9%. Note that this report showed 9% less cattle placed over 700 pounds while placements of calves under 700 pounds ran almost 30% higher This is the same pattern we have seen for the past 90 days and tells me that the vast majority of these cattle will not be finished cattle before May or June. I expect to see a continuation of the strong beef demand that will keep packers buying cattle and keep us current. We recently rallied our live cattle market about $5.00 during a period showing about a 3% increase in beef production. I expect the reduction in placements of yearlings plus the retention of heifers to create a tightness in finished cattle resulting in about a 3% reduction in beef production for the first half of 2000. I believe that this will bring us to a $75.00 futures market by April and maybe sooner. My recommendation remains to buy December, February, and April live cattle futures for a 500-point ($2.000.00) per contract move higher.
As explained above, while I am extremely bullish the above futures I believe the bulk of the calves that have been placed during the last 90 days will become finished cattle in the May-July period. For this reason I am now making a major spread recommendation, long February-short June cattle. This spread closed today with February 27 over June and I believe we could eventually see February 250 to 300 premium for a potential profit of $1,000.00 per spread on a $300.00 per spread margin.
For the past 5 years, in virtually every market letter I have written, I have strongly voiced my opinion about how the most negative aspect of the cattle industry is the selfish, self-destructive, marketing methods of selling cattle on a formula or contract, i.e., captive supply. Further evidence of the packer benefits of this practice were seen recently in Iowa as talk of an Excel plant being built brought IBP to the forefront trying to sign many more producers to formula deals. Why is it so difficult to see that this practice depresses the market and damages your neighbors. It helps only the packer and if this were not the case, he wouldn't offer it.
At the present time there are a few things occurring that could lead towards a reduction of packer price control. (a) Mandatory price reporting (b) Government investigation of corporate buy-outs and mergers (Smithfield and Murphy Farms). (c) Class action lawsuit against IBP for price manipulation. (d) Texas Cattle Feeders endorsement of a co-operative marketing plan. I believe these are all issues that are anti-captive supply and deserve any extra support you can give them. The most dangerous situation we are now facing is that cattle feeding is now in the middle of the best profits we have seen in many years and this has a tendency to cause many of us to forget about previous losses. This can and will prove to be extremely short-sighted as the price of feeders have Increased substantially, we remain at risk of severe weather, we remain subject to the possibility of increased feed cost. As you know, I remain very optimistic on the live cattle market for next year, however, the shame of it is that even if the higher prices happen, they will be substantially less than they belong because of the control we have turned over to the packer.
The entire cattle feeding industry is now hearing a great deal of talk about how packers do not expect to be able to hold the beef prices up and this will severely destroy their profit margins if they continue to pay over $70.00 for live cattle. This becomes even more interesting considering that almost every major packer is showing record yearly profits. The main producer problem remains our loss of our share of the total retail beef dollar, but I am now going to concern myself only with the producers share of the wholesale beef dollar (boxed beef).
In past letters I have repeatedly pointed out that the major emergence of captive supply power first showed up in March of 1994 when the worlds largest packer pulled out of the cash cattle market, worked almost totally off of formula cattle, and broke the market from $77.00 to $62.00 in about 10 weeks. It now appears that through the use of captive supply we have seen a second round of extreme power which began in mid-summer of 1998. Since 1992 we had seen the live cattle market average very close to 64% of the price of lightweight choice boxed beef. This underwent a radical change in mid-1998 and we have never recovered. On August3l, 1998 we had a boxed beef price of $102.55 with a live cattle price of $57.00 giving us a percentage of 55%. If we had received the 64% average price of the past 6 years the live cattle price would have been $65.60 or about $100.00 per head higher. Even today, while we appear to be dangerously happy with our $71.00 live cattle market, we must recognize that with a boxed beef trade of $119.50 we are still receiving under 60% of the boxed beef price. That 4% difference that is now going directly to the packer equates to about $62.00 per head. Remember these numbers the next time you hear or read about how the packer must cut back slaughter to regain his lost profit margin.Volatility in the futures means entry opportunities. Live cattle and beef information coupled with trading pit knowledge puts the chips on your side. Stay in contact. Stay current. Keep selling cash cattle on the open market.
30 S. Wacker, Ste. 1213, Chicago, Illinois
800-624-6572
(December 3, 1999) CATTLE: "VIEW FROM THE PIT"--We ended last week with a solid $71.00 live cattle trade and a boxed beet price for lightweight choice at $119.55. The picture appears to have gotten considerably more muddled this week, however, as we see that as of today (Wednesday PM) there has been no cash cattle trade in Texas or Kansas. On the other hand, Nebraska is showing over 60,000 head traded for the week with a top of 372.00 live or $114.00 in the beef. Despite this activity in Nebraska the bids in Texas and Kansas are $69.00 while offers are 371.00 and $72.00. I think it is also worth mentioning that Nebraska sells far fewer cattle on contract or formula than Texas or Kansas. Volume for the first 3 days of this week in Texas is 33,900 head with 33,800 as unpriced formula or contract sales while Kansas is showing volume of 42,800 head with 41,700 on formula or contract. Hmmm, I wonder what the price of those Texas and Kansas cattle would have been if somebody had to compete in the market to buy them?
The past 3 weeks have been extremely interesting In both the live market and the futures with the two of them not necessarily corresponding with each other. For example, on November we saw a cash cattle trade that week at $70.00 with a boxed beef trade on lightweight choice at $114.87. As of last week we put almost $5.00 on the beef price while only putting $1.00 on the live cattle price. December and February futures both rallied about 200 points from $69.00 to $71.00 before selling off sharply this week to close today near the monthly low prices of $69.57 and $69.22. in my opinion this recent weakness in the futures is the result of three main factors: (e) Extremely high open interest in the December futures contract. Since a high portion of the long positions are held by funds that must liquidate before deliveries can occur, and a high portion of the short positions are held by hedgers that remain until they market their cattle, it is not unusual to see pressure on the market during the month before deliveries. (b) An announcement earlier this weak that Mexico has decertified 17 packing plants (11 beef) for imports into Mexico. At this time the particulars remain vague on this issue, but it still leaves the door open for plants other than those listed to export product. (c) A great deal of rumor/talk about how the recent increase in beef demand was radically overdone with wild expectations for millennium business that is not happening. Rumors are that much of the advanced buying is being canceled and that will leave an excess of boxed beef. My response to that is simply if that were totally true why are we seeing cattle slaughter for the first 3 days of this week at 390.000 versus 374,000 last year.
While each of the above points are valid, I continue to believe that the increase in beef demand represents far more than Y2K. I believe it represents a major change in eating habits based on high protein. For instance the increase in beef demand began long before any of the Y2K buying began. Further proof of this can be easily seen statistically when we see that from April through October beef production increased about 3% over last year, while the boxed beef cut-out value increased 14%.
Per the November Cattle on Feed report, this report shows 6% more cattle in the feedlots with an increase in October placements of 9%. Note that this report showed 9% less cattle placed over 700 pounds while placements of calves under 700 pounds ran almost 30% higher This is the same pattern we have seen for the past 90 days and tells me that the vast majority of these cattle will not be finished cattle before May or June. I expect to see a continuation of the strong beef demand that will keep packers buying cattle and keep us current. We recently rallied our live cattle market about $5.00 during a period showing about a 3% increase in beef production. I expect the reduction in placements of yearlings plus the retention of heifers to create a tightness in finished cattle resulting in about a 3% reduction in beef production for the first half of 2000. I believe that this will bring us to a $75.00 futures market by April and maybe sooner. My recommendation remains to buy December, February, and April live cattle futures for a 500-point ($2.000.00) per contract move higher.
As explained above, while I am extremely bullish the above futures I believe the bulk of the calves that have been placed during the last 90 days will become finished cattle in the May-July period. For this reason I am now making a major spread recommendation, long February-short June cattle. This spread closed today with February 27 over June and I believe we could eventually see February 250 to 300 premium for a potential profit of $1,000.00 per spread on a $300.00 per spread margin.
For the past 5 years, in virtually every market letter I have written, I have strongly voiced my opinion about how the most negative aspect of the cattle industry is the selfish, self-destructive, marketing methods of selling cattle on a formula or contract, i.e., captive supply. Further evidence of the packer benefits of this practice were seen recently in Iowa as talk of an Excel plant being built brought IBP to the forefront trying to sign many more producers to formula deals. Why is it so difficult to see that this practice depresses the market and damages your neighbors. It helps only the packer and if this were not the case, he wouldn't offer it.
At the present time there are a few things occurring that could lead towards a reduction of packer price control. (a) Mandatory price reporting (b) Government investigation of corporate buy-outs and mergers (Smithfield and Murphy Farms). (c) Class action lawsuit against IBP for price manipulation. (d) Texas Cattle Feeders endorsement of a co-operative marketing plan. I believe these are all issues that are anti-captive supply and deserve any extra support you can give them. The most dangerous situation we are now facing is that cattle feeding is now in the middle of the best profits we have seen in many years and this has a tendency to cause many of us to forget about previous losses. This can and will prove to be extremely short-sighted as the price of feeders have Increased substantially, we remain at risk of severe weather, we remain subject to the possibility of increased feed cost. As you know, I remain very optimistic on the live cattle market for next year, however, the shame of it is that even if the higher prices happen, they will be substantially less than they belong because of the control we have turned over to the packer.
The entire cattle feeding industry is now hearing a great deal of talk about how packers do not expect to be able to hold the beef prices up and this will severely destroy their profit margins if they continue to pay over $70.00 for live cattle. This becomes even more interesting considering that almost every major packer is showing record yearly profits. The main producer problem remains our loss of our share of the total retail beef dollar, but I am now going to concern myself only with the producers share of the wholesale beef dollar (boxed beef).
In past letters I have repeatedly pointed out that the major emergence of captive supply power first showed up in March of 1994 when the worlds largest packer pulled out of the cash cattle market, worked almost totally off of formula cattle, and broke the market from $77.00 to $62.00 in about 10 weeks. It now appears that through the use of captive supply we have seen a second round of extreme power which began in mid-summer of 1998. Since 1992 we had seen the live cattle market average very close to 64% of the price of lightweight choice boxed beef. This underwent a radical change in mid-1998 and we have never recovered. On August3l, 1998 we had a boxed beef price of $102.55 with a live cattle price of $57.00 giving us a percentage of 55%. If we had received the 64% average price of the past 6 years the live cattle price would have been $65.60 or about $100.00 per head higher. Even today, while we appear to be dangerously happy with our $71.00 live cattle market, we must recognize that with a boxed beef trade of $119.50 we are still receiving under 60% of the boxed beef price. That 4% difference that is now going directly to the packer equates to about $62.00 per head. Remember these numbers the next time you hear or read about how the packer must cut back slaughter to regain his lost profit margin.Volatility in the futures means entry opportunities. Live cattle and beef information coupled with trading pit knowledge puts the chips on your side. Stay in contact. Stay current. Keep selling cash cattle on the open market.